China's Economy Faces Challenges Amid Inflation and Deflation

China's consumer inflation rate rose to 0.8% in December, its highest level since February 2023, driven by a surge in fresh vegetable prices due to supply shortages. However, the full-year inflation rate remained flat, missing the official target of 'around 2%', indicating weak demand. Factory-gate prices continued to decline, with a 1.9% drop in December, extending the deflationary streak beyond three years. Economists expect China's annual consumer inflation to remain flat in 2025, while producer price deflation is forecast at 2.7%. The economy faces challenges, including a prolonged property crisis and uncertain employment outlook, with policymakers reiterating plans to boost consumption and stabilize the property market.

The Chinese government may be preparing to take stronger measures to support the country's struggling real estate sector, according to a recent article in the Communist Party's official journal Qiushi. The article called for 'more powerful and precise measures' to stabilize the property market and reflected a comprehensive assessment of the sector's challenges. Analysts believe that the government may introduce more decisive action at the annual parliamentary meeting in March, including measures to reduce the financial burden on homebuyers and support larger cities. The property downturn has dragged on despite previous calls from top leaders to halt the sector's decline, with new home sales nearly halving since Beijing started cracking down on developers' heavy reliance on debt for growth.

China's consumer prices remained flat in 2025 compared to the previous year, missing the official 2% growth target, while factory-gate prices fell by 2.6%, indicating ongoing deflationary pressures. The consumer price index (CPI) rose by 0.8% in December, the highest monthly increase since March 2023, driven by a faster rise in food prices. The producer price index (PPI) declined for the 39th consecutive month, falling by 1.9% in December. Beijing has been working to combat industrial overcapacity and fierce competition in key sectors to stabilize the economy and support growth.

Investment banks Julius Baer and Citibank predict that Chinese AI-related stocks will continue to drive market gains in Hong Kong and mainland China in 2026, although at a slower pace than in 2025. Julius Baer has set a 12-month target for the CSI 300 Index at 5,100 and the Hang Seng Index at 29,500. The banks believe that foreign funds will continue to invest in Chinese tech stocks, which are still underweight compared to US tech firms.